The government's own figures put VAT fraud losses at £1.9bn for 2004/05. Estimates for 2005/06 are not expected until the Chancellor's pre-Budget report is published later this year.

Huge losses

The higher £8bn Belgian estimate is based on figures from Eurocanet - a project sponsored by the European Commission using figures from the police and other groups.

STOLEN VAT JUNE 2005/6

UK 12.6bn euros (£8.4bn)

Spain 2.6bn euros (£1.7bn)

Italy 2.3bn euros (£1.5bn)

Germany 1.9bn euros (£1.3bn)

France 1.5bn euros (£1bn)

Source: Eurocanet

"We estimate the loss to Britain to amount to 3.7bn euros with the 'Dubai Connection' adding some 8.5bn euros to this figure. It's clear there are very close commercial links between Britain and Dubai," said Herve Jamar, the Belgian Secretary of State responsible for VAT.

"Carousel fraud" involves the repeated import and export of small, high-value goods such as computer chips and mobile phones.

Under EU trading rules a UK company importing the goods does not have to pay VAT, instead it is charged to the British company that sells the goods on. The goods are then exported before being re-imported.

Each time the goods go round the carousel, the VAT that should be paid to Her Majesty's Revenue and Customs (HMRC) goes missing.

'Dubai Connection'

The fraud first emerged in the mid-1990s but has exploded in the UK over the past year as criminals exploit what legal authorities call the "Dubai Connection".

This involves exporting the goods to Dubai before sending them back into Europe and round the carousel again.

By exporting the goods to Dubai, the fraudsters break the evidential chain making the fraud harder to detect.

WHAT IS CAROUSEL FRAUD?

Small high-value goods, such as mobile phones, are imported free of VAT from EU countries and sold with 17.5% tax added in the UK.

Instead of handing the VAT to the Government, the importing company run by criminals is shut down and the cash is kept by the importers.

This loss of tax is often compounded when the new owners of the goods export them again and can legally reclaim the VAT they paid.

Goods go round in a "carousel" via bogus supply chains within and beyond the EU because they are repeatedly imported and exported.

By exporting the goods to Dubai, the fraudsters break the evidential chain making the fraud harder to detect.

According to Eurocanet, almost three quarters of the tax stolen by the fraudsters in the UK between June 2005 and June 2006 involved carousel frauds using the 'Dubai Connection'.

However, the Treasury has vowed to tackle the problem through a "reverse charge" scheme, which will come into force in December.

Under the new rules the last company to sell on goods like mobile phones - such as a retailer - will be responsible for paying the VAT.

"If it was implemented it would remove the mechanism for stealing VAT from about 95% of the goods traded in carousel frauds," Treasury Committee chairman John McFall told BBC News.

"The government, I believe, has got space in the Finance Bill to include that reverse charge."

A Treasury spokesman said the government was working hard to tackle the problem "through a combination of legislation, litigation and operational activity", with 1,400 HMRC officers dedicated to the task.

Recently, the London offices of Transworld Payment Solutions were raided in an international operation against an offshore bank involved in VAT fraud.

HMRC sources told the BBC that the move had led to a "significant" fall in the trade in fraud during July.

This is a website update to a Panorama film first broadcast on July 16 2006 called Do You Want To Be A Millionaire which investigated "carousel fraud" and confronted one convicted criminal, "Riviera" Ray Woolley. He was hiding in Switzerland having escaped from prison by hailing a taxi.